As more developing countries tap international financial markets and more countries draw upon alternative sources for sovereign financing, borrowing needs to be managed prudently, especially in a challenging global environment. The Monterrey Consensus welcomed consideration of an international debt workout mechanism. However, proposals for a statutory mechanism did not receive sufficient political support. The focus has been on market-based solutions, such as contractual clauses in bond contracts and reform of IMF lending into arrears policy, and "soft-law" approaches such as principles and guidelines for debtor and creditor responsibilities.
In October 2014, the Executive Board of the IMF endorsed key features of enhanced collective action and pari passu clauses in international sovereign bond contracts to reduce their vulnerability to holdout creditors in case of a debt restructuring. The enhanced clauses were recommended by the International Capital Market Association, partly in response to litigation against Argentina and New York courts’ interpretation of the pari passu clause, and growing concerns over strategic behaviour by bondholders to build blocking positions in individual bond series. The enhanced clauses allow a supermajority of creditors to approve a debt restructuring proposal in one vote across multiple bond series. The revised pari passu clause specifies that equal ranking of debt securities does not imply a requirement to pay all creditors on a rateable (“pro rata”) basis. In late 2012, in litigation involving Argentina with its holdout creditors, New York courts had interpreted the pari passu clause as requiring rateable payments, and blocked scheduled payments to bondholders who had participated in the debt exchange until the government paid holdouts.
Since that time, significant progress has been made in incorporating these provisions in international sovereign bonds. Based on information available as of October 2016, the IMF reported
that 154 out of a total of 228 international bond issuances since October 2014 have included enhanced collective action clauses, representing 74 percent of the nominal principal amount. The modified pari passu clause is largely incorporated along with enhanced CACs, with some exceptions. However, the outstanding stock of international sovereign bonds without the enhanced clauses remains a challenge, at about US$ 846 billion as of end-October 2016. Only about 18 percent of the total outstanding stock of approximately US$ 1.031 trillion includes such clauses, and the share of stock without clauses is declining only slowly.
In December 2016, five years after the original ruling that assessed Argentina to be in breach of its pari passu clause, the United States District Court for the Southern District of New York found that the same sovereign's payments to other creditors did not violate rights of non-settling investors and did not breach the pari passu clause. Only actions affecting the ranking of payment obligations would constitute such a breach.